Overall vacancy increases but is limited to a few properties

• Vacancy in the CBD increased from 3.8% to 6.1% during the quarter, representing an additional available space of about 28,400 sqm. Prime vacancy increased from 1.8% to 4.0%, while secondary vacancy increased from 5.0% to 7.3%. During the next few years, prime vacancy is expected to decrease and stabilise at 3.0%, while secondary vacancy is expected to gradually increase to around 10.0%.
• Although vacancy has increased in the quarter, with the presence of government tenants as a key demand driver for office space, prime vacancy is expected to remain low, while secondary vacancy may face some upward pressure as we are expecting increasing back-fill vacancy from the completion of existing developments.

Developments constitute both refurbishments and new construction

• A 34,230-sqm, 15-storey office tower, 55 Featherston Street (Asteron House), is now back online after a full refurbishment, with the IRD occupying half of the building. On the other hand, refurbishments have started for 33 Customhouse Quay (Meridian Energy Building), a 5,600-sqm property, and 80 The Terrace (10,600 sqm).
• There is further pipeline supply of several new developments: 2-13 Aitken Street (Archives Building, leased to Archives New Zealand), 48 Mulgrave Street, 55-61 Molesworth Street, 178 Willis Street (Central Area Building), the Victoria Lane offices (79 Dixon Street and 167-171 Victoria Street), and Willis Bond’s 110 Jervois Quay.

Price discovery continues with a dearth of transactions

• There have been no significant transactions in the market in 2023. Average net prime yields softened by 13 bps to reach 6.10%. On the other hand, average net secondary yields softened by 25 bps to reach 8.13%. Both yields are expected to soften further by 13 bps by the end of 2023.
• We are anticipating Wellington office yields to remain in a stable range in the short term. This is taking into consideration the city’s ongoing seismic risk associated with its office buildings. However, due to the higher interest rate environment, yields are forecast to soften to 6.23% by the end of 2024, with net yields for secondary assets forecast to soften to 8.25% for the same period.

Outlook: Rents for prime buildings to increase by year-end 2023

• Although average gross rents were unchanged across all precincts and grades for the second quarter, average gross prime rents have registered a 2.8% y-o-y increase since June 2022. We are expecting these to increase by NZD 5 per sqm per month by the end-2023, due to the high demand for seismically-strengthened office space in the CBD.
• Similar to other office markets across the Asia-Pacific region, the Wellington CBD office market’s sentiment has been positive this year. This is due to corporate occupiers encouraging staff to return to the office to work collaboratively and increase productivity. As evidenced by a large number of leases during the quarter, this trend is expected to carry on for the remainder of the year.